A 25% rise in apartment prices in Germany’s seven largest cities since 2010 is not a threat to German lenders, according to Fitch and Moody’s, with the latter today (Monday) noting that Pfandbriefe are also not at risk.

Deutsche Bundesbank

The 25% rise cited by the rating agencies is based on Bundesbank figures released last Monday, when the central bank said that, applying a fundamental valuation model, property prices in the seven cities – Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf – may be overvalued by up to 20%.

While Moody’s said that a price reversal would negatively affect the credit quality of mortgage loans backed by such properties, it considered such a scenario unlikely.

“A sharp price reversal is unlikely because we consider recent price increases to be mainly driven by a shortage of supply and thus do not pose an imminent risk for residential mortgage lenders and covered bonds,” it said.

Moody’s noted that wider German property prices had risen more moderately, at 2.75% per year since 2010, reversing a decline in real value over the prior 10 years.

“Moreover, these property price rises have not been accompanied by higher credit volumes, and the Deutsche Bundesbank lender survey shows banks continue to apply tighter lending standards,” it added.

Fitch said there are several reasons it does not expect the increase in property values to lead to a material deterioration in German banks’ asset quality.

“Banks do not appear to have materially weakened standards when underwriting mortgages for urban apartments,” it said. “Most residential mortgage portfolios are regionally diversified and property prices outside the top seven cities have grown only moderately, following a long period of stagnation across the country.

“The fixed rate nature of German mortgage financing also protects the banks against deterioration from a short term rise in interest rates.”

Fitch nevertheless said it would not rule out the risk that some banks could misprice loans for speculative real estate investments in non-prime locations.

“We would consider it negative for ratings if banks started relying only on property values for underwriting loans,” it said, “especially as there is a lack of transparency on origination standards – for example, there is no consistent bank disclosure of loan-to-values, vintage or the proportion of loans for rental properties.”

Moody’s meanwhile highlighted the 60% loan-to-value limit for Pfandbriefe and that this in turn is based on the lending value and not market value of a property.

“The Pfandbrief framework defines the lending value as the long-term sustainable property value excluding any speculative price components,” said the rating agency. “The Pfandbrief Act also stipulates that property valuations are not indexed after loan origination in case of property price increases.

“Therefore, rising property prices do not introduce additional risk to cover pools with respect to loans that originated before the recent increase in property prices, and would only affect recently originated loans.”